4 Key Steps Finance Must Take to Tackle the Growing Water Crisis
The financial community increasingly understands and accepts that the global climate and biodiversity crises constitute a systemic and financial risk. This spurred action. Similar efforts to address the global water crisis have been slower to gain traction.
Persistent gap in funding for water security
Alarm bells have been ringing in the past few months alone, with the world’s top scientists from the Intergovernmental Panel on Climate Change explaining how the climate crisis is deepening and accelerating the water crisis. A new global assessment identifies the critical sectors and industries – as well as business activities – most affecting the availability and quality of freshwater, while another recent analysis highlights the persistent financing gap to ensure a secure future in water material.
These messages make it clear that key financial actors such as institutional investors, banks and development finance institutions must urgently mobilize to address the water crisis.
Water risk is a systemic and material risk that currently results in significant economic and social costs, ranging from supply chain disruptions triggered by climate-fueled floods and droughts to water and food insecurity. caused by the decrease in water supply.
By ignoring water security in financial decision-making, financial markets contribute to large financial flows that increase exposure and vulnerability to water-related risks across the country. Mondial economy. These range from urban development that ignores new weather risks, changing weather patterns and aging infrastructure, to investments in water-intensive economic activities, such as agriculture and mining.
Main sectors contributing most effectively to the water crisis. Image: Ceres.
More so, these investments have a blind spot when they fail to consider the impact the water crisis may have on them, contributing to the risk of future stranded assets. This threatens asset prices, economic activity and undermines progress towards UN Sustainable Development Goal 6 on water and sanitation, and broader environmental and economic priorities.
Finance, a key pillar in solving the water crisis
The longer it takes for funding to elevate water security in decision-making, the more we put society and the economy at risk. At least half of the industries in the US economy face water-related risks. This is exemplified by the finding that 50% of stocks listed in each of the four major US equity indices belong to industries with medium to high water-related risks.
Some 69% of listed stocks globally face around $300 billion in enterprise value at risk, and billions more in stranded assets. The cost of water-related risks to businesses could be more than five times the cost of acting now to address those risks, a gap that significantly increases financial exposure.
The cost of water-related risks to businesses could be more than five times the cost of acting now to address those risks, a gap that significantly increases financial exposure.
Prominent voices in the financial sector are calling for action on the water crisis to ensure financial and economic stability and security. The Network for Greening the Financial System, the group of 108 central banks focused on climate and environmental risk management, explicitly called for the need to focus on water risk in a 2020 report.
The United Nations specifically identifies finance as an essential pillar for ensuring water security, as called for in Sustainable Development Goal 6 on water and sanitation, and the European Union seeks to mandate reporting on water through its directive on sustainable financial reporting.
Four steps to having a positive impact on water security
There are practical steps that financial institutions can take now to protect themselves from the risks created by the water crisis and have a positive impact on water security. Here are several ways in which capital market participants can act:
1. Assess and disclose the impacts and risks of water finance
Disclosure of measures taken by financial institutions to measure and manage water-related impacts and risks in their portfolios, loan portfolios or underwriting markets. A study shows that investors subject to climate reporting have reduced their financing of fossil fuels by 40%.
In April, CDP made available to 1,200 publicly traded financial institutions the first request for water information to shed light on portfolio water impacts and divert capital allocation from negative investments for water. Currently, more than a third of financial institutions that publish information do not consider water issues in their investment decisions.
2. Engage with businesses
Investors can engage with companies in their portfolios to mitigate water risk. To scale up corporate action, investors can enroll in the Ceres Valuing Water Finance initiative, an investor-led global engagement effort that develops bold steps companies should take to improve water management. water.
Investor commitments have prompted companies to tackle the operational and supply chain activities responsible for the most serious and systemic impacts on water.
3. Invest in water crisis solutions
Financial institutions have the capital to support investments and reduce the risks associated with floods, droughts, aging infrastructure and water pollution.
For example, they can partner with development finance on blended finance models that offer technical assistance and guarantees to create opportunities to attract commercial capital for water-related investments.
4. Advocate for stricter regulation
Financial regulators around the world are exploring ways to adapt current climate-related reporting policies to include water-related risks. Financial institutions can advocate for these changes. For example, financial institutions can comment on the new regulations proposed by the United States Securities and Exchange Commission on climate disclosure to ensure that water risk is part of the following rule.
Regulators are essential to avoid a new disconnect between the economy, which is increasingly exposed to water-related risks, and the financial system, which is artificially protected from it.
Creating a water safer world
Financial institutions can help ensure universal access to safe drinking water and improved sanitation, sustainable management of water resources and prevention of further floods and droughts. But they can’t wait to act. The water crisis will not wait.
Now is the time to take advantage of their unique position and start factoring water safety into their decisions. Together, with the right solutions outlined above, these institutions can be a central driver towards a more water secure world.